European Bond Yields Rise; Greece to Exceed Deficit Targets

Devan Biswas
13 Dec, 2011
New York City

European markets traded sideways as several of fiscal compact agreement provisions went effective today. Yields on Italian, Spanish and Irish bonds closed higher. Greece deficit is expected to exceed its target as tax collection lags and economy faces recession for the fourth year in a row.

[R]4:40 PM Frankfurt – European markets traded sideways as several of fiscal compact agreement provisions went effective today. Yields on Italian, Spanish and Irish bonds closed higher. Greece deficit is expected to exceed its target as tax collection lags and economy faces recession for the fourth year in a row.[/R]

Market indexes in Europe were nearly flat as investors await central bank action to support sovereign bond yields.

Though markets have been calm today, investors are nervous that the European Central Bank may not step up its bond buying program and yields may continue to rise in the euro zone.

As many as 26 European Union nations are expected to finalize budget pact that will enforce fiscal compact by March according to officials today. Sweden, Czech Republic and Hungary need parliamentary approval before they can extend their backing and the UK has rejected the deal.

Several mechanisms to contain the government spending in most nations in the euro zone become effective today but automatic sanctions in the new intergovernmental treaty are still not finalized.

The latest survey of investor sentiment in Germany showed an increase but market outlook remained gloomy. The ZEW index increased to -53.8 in December from -55.2 in November.

In Paris trading CAC 40 Index eased 1.04 to 3,088.55 and DAX 30 Index rose 0.6% or 35.34 to 5,820.77. The euro traded near $1.32 and the ECB said the demand for short term loans at its recently opened dollar window was close to €300 billion, the high in 30 months.

In other markets in the Europe, the benchmark index in Spain fell 0.2%, in Italy added 0.7%, in Greece soared 1.9% and in Switzerland was flat.

Greece said its budget gap widened 5.1% to €20.52 billion in eleven months to November from a year ago as construction dropped 38% in the year to August.

The deficit in the current year is expected to increase to 10%, higher than the target by the central bank of 9% and the economy is expected to shrink by 5.5%.

Greece is expected to enter into a recession for the fifth year in a row next year and budget deficit in 2012 is estimated to narrow to 9%.

Despite the higher and new taxes, the government’s tax collection declined 3.1% in the year to November from 4.1% in the year to September. The government levied 5% additional tax on gross income and a new property tax this year.

The closely watched Italian 10-years bond yield rose 10 basis points to 6.7% and the yield on similar Spanish bond increased 2 basis points to 5.83%. Traders reported that the ECB was active in the market and was adding purchases of maturities up to 10 years.

Italy on Tuesday completed the sale of €7 billion of 1-year debt that yielded 5.95% compared to the 6.09% yield at the previous auction on November 10.

Greece’s Public Debt Management Agency sold €1.625 billion of 6-month T-bills at 6 basis points higher yield compared to previous auction to 4.95%.

The European Stability Facility sold €1.97 billion of 3-month short term bills that yielded 0.22%.

Stock Movers

Banks traded mixed after Greece, Italy, Spain and EFSF completed the sale of debt auction yesterday.

BNP Paribas declined 75 cents to €30.11, Societe Generale fell 58 cents to €18.02 and Commerzbank dropped 5 cents to €1.17.

Commerzbank said it has no plans to access state funding as the battered bank increases its capital to meet the higher capital ratios.

The bank is required by the European Banking Authority to increase its capital by €5.3 billion before June of 2012.

Volkwagen AG increased €1.45 to 108.20 and Porsche Automobil Holding SE increased 96 cents to €42.73.

Porsche Holdings, the part of the Volkswagen group and the Europe’s largest auto dealership group said it expects 2011 revenues may increase to €14 billion in the current year.

Rio Tinto Plc increased 3.2% to 3,218 pence and the Anglo Australian mining company said it won an arbitration ruling that will allow the company to increase its stake in Canada based Ivanhoe Mines.

Rio said in a statement that it is free to pursue to Ivanhoe from January 19 of 2012 but has no plans to increase its stake in its joint venture partner in a copper mining venture Oyu Tolgoi in Mongolia.

Statoil ASA edge down 0.3% after the Norway controlled energy company said it plans to develop its offshore gas field using a floating production platform at a cost of NOK 34 billion or $5.8 billion.

Total reserves at the field are estimated at about 47 billion cubic meters of gas and 0.8 billion of cubic meters of condensate.